I'm not sure that this question is truly behavioral finance, but it made me wonder if behavioral finance questions are on-topic or not. I lean towards "no" unless they're sufficiently quantitative to qualify as quantitative behavioral finance.

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6 Answers 6

It seems that "quantitative finance" isn't necessarily behavioral or rational, but is instead a means of implementing behavioral or rational strategies.

For example, A lot algorithmic trading just boils down to very sophisticated technical analysis, which is behavioral. While convergence trades are looking for violations of the law of one price, which is rational.

It seems that if the question is within a certain distance of analysis or implementation, then it should be fair game. I think the process is working great here and the guys with experience are doing the necessary policing early on to focus the community (I know I've gotten good feedback from the community for answering weak questions :) ).

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To me, this question is not off-topic. How can these type of questions not come up?

The first time I was asked if this technical analysis thing worked or that thing worked, my answer was "...duuuuuh, I don't know...". I tried a few things, proved a few things, screwed up a lot of things, and sometimes ended up with the answer "...duuuuuh, I don't know...".

The bottom line is, unless I've actually beat this stuff to death, I don't know. People that come to this message board are in various stages of beating stuff to death.

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To justify my point I will say that I am not a trader and I am working in a famous European university in the field of probability theory. Surely, quantitative finance is an area which is different from technical analysis, accounting, traditional economics, classical finance, etc. due to strong theoretical and mathematical background and need for strict proofs and facts.

On the other hand modelling and developing theory in this field have to be connected with motivation from the real life. I am not a chartist and I am not trying to make connections between patterns - but in my opinion it is nice to update the theory using just simple information about underground processes.

As you can remember even classical (now) Black&Scholes(&Merton) theory was motivated by postulates of EMH which also come from the behavioral finance. I am not trying to make a topic on psychology of trading - but to investigate this particular problem of support and resistance from the mathematical point of view.

With regards to the literature - I think it is important to share opinions and to give advises about really nice and relevant literature. As you can see from the topic - I asked exactly for the relevant book which will not teach me how to trade but just will explain the motivation why support and resistance is used.

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If all you want is the motivation, here's the main book on technical analysis. It's like Ptolemy's astronomy in that it can be used to make predictions about celestial movements, but that doesn't mean it's true. –  chrisaycock Mar 3 '11 at 15:02
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IMO the behavioral finance is in scope of this forum. The fact that from the quantitative perspective the domain may be still in its infancy does not justify throwing it away. Clearly some crowd phenomena can be modelled well, e.g. as shown in this rant by S. Locklin: https://scottlocklin.wordpress.com/2010/02/02/music-molecules-and-misanthropy-econophysics-part-1/.

Personally I believe that in the course of time the behavioral finance will be getting closer to other natural sciences. And if one doesn't like the name "behavioral finance" then it may be called "econophysics" as well.

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No field of finance will ever be part of the natural sciences in the same way that psychology and sociology are not natural sciences. Valuations are a subjective concept; it's not gravity or photosynthesis. The availability of quant tools does not change the inherently subjective nature. –  chrisaycock Mar 3 '11 at 14:52
    
@chrisaycock: that's what Hayek called scientism. –  Joshua Ulrich Mar 3 '11 at 15:28
    
Right, valuation is subjective when it comes to an individual. But it has not been proven that it cannot be modeled when it comes to crowd. I thinks that an analogy to gas may be appropriate here: it's virtually impossible to to predict movement of a single gas particle yet gas as a whole can be modeled using statistical approach. And gas dynamics is considered to be a part of physics. I believe the same applies to behavioral finance (yet to be proven of course). –  wburzyns Mar 3 '11 at 20:13
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Agreed. Non-quant questions are not in scope. That includes accounting, traditional economics, general finance, etc. Those fields have different techniques and cultures, which means that it is unlikely there would be any overlap between us and them.

The referenced question is about "technical analysis", and using charts in particular. I've always thought of chartists as the numerologists of the finance community. They certainly aren't quants, and that's the first problem with this question.

The second problem is that the question asks for a book recommendation! That's something we are actively discouraging.

I haven't voted to close because I am actually interested to see what could possibly be a valid answer for this.

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"Behavioral finance" questions are not in scope.

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